Managing for Retail Cash Flow
Small retailers who manage for cash flow succeed by pulling together the retail fundamentals.
For just about every small retailers, cash is king. Whether the focus is on daily and weekly sales to assure that there's money in the bank to meet the weekly payroll and other expenses, or on building a cash balance during the busy season to get you through the slower times, most small retailers keep a very close eye on retail cash flow.
Obviously, there are many factors that determine whether a small retailer is meeting, and exceeding, its cash requirements and building cash balances on an on-going basis. But for most, the cash profile of the business can be traced directly back to a series of retail fundamentals concerning mission and strategic positioning.
The critical strategic advantage of any small retailer is the ability to focus on, and respond quickly to, its customer's needs, while providing a superior level of customer service and state-of-the-art product knowledge. The one thing that the Big Box retailers excel at is driving down costs and offering their customers the lowest price for commodity or near-commodity goods. They understand that for these items the vast majority of shoppers are highly price sensitive.
But for any item, and especially for those that are not commodities, there is a critical segment of customers who are not price shoppers, who focus instead on product quality, service and a relaxed, friendly experience.
In other words, small retailers should avoid competing on the basis of price because there will always be a competitor with larger, deeper pockets who will be able to undercut you. Competing on the basis of product quality, product knowledge and customer service enables a small retailer to present to their customers a compelling value proposition and maintain critical price integrity.
Strategic positioning, therefore, leads directly to product selection and pricing policy. Selling higher quality, specialty products on the basis of their intrinsic value, and the product knowledge and customer service that accompany them, insulates a small retailer from price competition, and enables the retailer to obtain a higher initial markup, and avoid corrosive sales, price promotions and other incentives that eat into margins.
Here are a few specific ideas to help position your store as a premium destination for the finest products, knowledge and service, and generate the margins you'll need to assure continuing positive cash flows:
- Adopt a Better/Best pricing structure rather than a Good/Better/Best structure. The classic retail pricing structure for any product category is three tiered, with an opening priced "good" quality item, a mid-priced "better" quality item, and a higher-priced "best" quality item. The nature of contemporary retailing is that for most any product category there is a Big Box who is seeking to lock up the opening price point. Let them. They are more than happy to trade margin for volume, and have the deep pockets to do it. Instead, protect your margins by focusing your efforts on better quality goods, using a "Better" quality item as your opening price point, and focusing your energies around the quality and features of the "Best" item.
- A corollary to the first point is to avoid carrying the exact same items as the competing Big Box. This may not always be possible, but if you must, think of those items as accommodations to your customers rather than key items that you are trying to maximize the sale of. Rather, build your business around unique items and unique product categories in niche markets to a carefully targeted clientele.
- Keep your inventories lean to minimize markdowns and their impact on margins. The instinct of many small retailers is to have enough stock to never miss a sale, but all that inventory carries tremendous markdown risk, which can decimate margins and cash flow. Bring fresh inventory into your store as close to the time of anticipated sales as possible. That way, you'll also always have something new and exciting to offer your customers.
- Don't get locked into standardized pricing formulas, like keystoning. Your pricing should not be merely a function of what you paid your vendor for the item, but rather the intrinsic value of the item, and the accompanying service you provide your customers. The product knowledge and customer service that comes with your product offerings has a value to your customers. Don't be afraid to include that value in your pricing.
- Avoid price-item advertising at all costs. Focus your advertising on building the brand cachet of your store, not specific sales or promotions. When customers think about you, make sure your advertising has left them with the thought that you are THE destination for premium quality and selection, state-of-the-art product knowledge and outstanding customer service, and not price.
- From a customer's perspective, customer service and product knowledge are the means to resolving problems. Whether a customer turns to you for something to knock back the pesky weeds in their vegetable garden or for a truly unique anniversary gift for their favorite aunt, customers are willing to pay for solutions. Make sure you and your staff are armed with state-of-the-art product knowledge and the offer your customers the very finest service.
Define your mission around offering your customers premium specialty products, state-of-the-art product knowledge and the finest customer service and you will insulate yourself from corrosive price competition, while protecting your margins and cash flow.